November 17, 2008

Brother, Can You Spare $25 Billion

What is it with this whole "GM MUST DIE!" meme propagating in the progressive/eco blogosphere? From Matt Yglesias still thinking that somehow it's okay if GM liquidates to the eco-bloggers who seem positively gleeful about GM's possible demise, it really is quite shocking. We just elected the most progressive president since LBJ and now we want him to preside over the mass layoffs of up to three million workers at a cost to the government of, according to Bloomberg, up to $200 billion? In the middle of a Depression?! Judas Priest!! WHAT is UP with THAT?! I do know this - somewhere Herbert Hoover is smiling.

The New Republic's Jonathan Cohn, at least, is having none of it. Nor is Paul Krugman (and he's a Nobel Prizewinner!) Are the Big Three blameless? Far from it. Should some or all of GM senior management be shown the door. Yes: Mr. Lutz, here's your hat. But let them all burn? To say it's an over-reaction is an understatement. Things really are changing in Detriot. The unions have given concession after concession and restructured their labor contracts to reduce the impact of health and pension benefits. And Cohn explains how the improvements are in the showroom and on the factory floor as well:
According to the most recent Harbour Report, the benchmark guide for manufacturing prowess, Chrysler's factories now match Toyota's for the most productive, while both Ford's and GM's are improving. (A Toledo Jeep factory was actually named the nation's most efficient.) Consumer Reports now says Ford's reliability is approaching that of perennial leaders Honda and Toyota, whose ratings actually slipped last year. In late 2010, GM will introduce the Chevrolet Volt, a plug-in hybrid that can go 40 miles without gas, and the Chevrolet Cruze, a compact that relies solely on gas but that gets 45 miles to the gallon. The Volt would represent a rare leap ahead of the Japanese, who never embraced plug-in technology with the same enthusiasm. It's also typical of the better cars that observers say Detroit has in store. "There's a lot of accumulated negativity about these companies out there," says Wharton's John Paul MacDuffie, who directs the International Motor Vehicle Program. "U.S. consumers gave the Big Three the benefit of the doubt for a long time before turning away from them, and now their reputation is worse than their actual performance and progress toward needed reforms."
The Chevy Volt, by the way, is a huge deal. Not only will it be the world's first commercially-produced plug-in hybrid, but it will use a lithium-ion battery. Today's hybrid's use nickel batteries. Nickel mining is highly competitive with coal as the worst, most environmentally devastating, carbon-intensive industry. As a result, every hybrid drives off the lot carrying a "carbon debt" which, according to Wired Magazine, takes over 45,000 of driving to "drive off." Lithium ion is the acknowledged future of battery technology, and GM would be first out of the gate. But better to spite our faces, right?

But wait, there's more! After cheerleading for 3 million pink slips, most bloggers then say, "well, if we HAVE to bail those bastards out, at least attach some "green" strings," as if that's some meaningless little thrown bone. Um, hello? Has anyone been paying attention? Mileage standards have been stuck at around 27mpg for 20 years and will only need to go up another 8mpg over the next 12 years. In one swell foop we could revolutionize those standards, thus breaking a decades long political logjam. As Joe Romm (an eco-expert who supports a bailout) points out, greener cars will play a major role in lowering our carbon footprint. And here comes a once in a lifetime opportunity to show some fortitude and remake an industry. But, no, no. Better to make the "safe" decision and go with the pink slips.

And let's not forget Democrat John Dingell, congressman from Michigan, who has "protected" the auto industry from reform since long before most readers of this blog were born, and would jump on any bailout bandwagon, no matter what the industry was forced to do. Heck, he'd probably eat his Energy and Commerce Committee chairman's gavel if an amendment that so required was attached to bailout legislation, rather than oversee the destruction of the industry.

And I would also suggest that you turn your heads, oh you Big Three killers, and look whose shining face rests on the pillow next to you. It's none other than the GOP, which is honestly and truly gleeful at finally FINALLY destroying one of the last powerful unions left. There are strange bedfellows and there are toxic bedfellows. Just thinking about it makes me want to take a shower.

So, let's stop debating the possibility of bailing on the bailout and start debating the best way to help an industry transform itself for a carbon-neutral future. Can I hear a "Yes, We Can!"

[Updated: 2:30pm] My Blogger Ethics Advisor informed me that in my rush to post this, I neglected to mention that I, like the TNR's Jonathan Cohn, have a family connection to GM. In the wake of an accounting scandal a couple years ago, my father was named to the GM board to help improve financial controls. But you only need to read the above post (especially the bit about Bob Lutz) to see that I am not exactly a mouthpiece for GM. I myself don't own a single share of the company and a GM default would have zero bearing on my finances. The fact that GM itself doesn't want to die and I don't think it's such a hot idea either are about the extent our common ground... That's blogging on an empty stomach for you!

Photo by GM

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Blogger Denis Drew said...

Now is not the time to strip GM's management, either -- not when the company is finally being run by an engineer, Japanese style (a Boeing guy) instead of a salesman; not just when said engineer is directing GM through a giant leap forward to simple, almost foolproof, 100 mpg electric drive-hybrids.

The Big 3 re-invented themselves once before -- remember the first oil crises of the late 70s. More digital (electric) and less analog (gas) technology make the engineering more a matter of chalking equations on a blackboard then endlessly dueling with mother nature's whims.

As for all the bellyaching about high Big 3 labor costs: just when America should (hopefully) be stepping back from the homegrown race to the bottom as well as the downward pressure on wages from both (!) foreign born workers at home (at levels unique in all the OECD) as well as abroad -- via legislation that puts strong supports under the price of American labor (hopefully doubling the minimum wage to half the "true" average wage and hopefully mandating a version of sector-wide labor agreements) -- is not the time to be crushing the auto industry's gold standard of wages and (just imagine!) benefits.

Our blue collar workers right now seem to be caught between the red, white and blue conservatives who don't happen to care what happens to working Americans and supposed progressives who don't seem to care at all about the survival of the red, white and blue's flagship industries. Hopefully whoever is left will have enough sense to care about both; hopefully they make up the majority.

Blogger Demosthenes said...

Progressives really, really don't like corporate welfare. Nor should they: by and large it's been used to prop up companies that do little good for the environment, workers, or consumers.

But I think Tom's right, in that GM is different. If it has improved, then it may well need to be encouraged on that front, and this whole thing really does smack of an attempt to cripple unions by the back door. Taking away millions and millions of good manufacturing jobs is not going to help America's Gini coefficient.

Sure, it needs to be smart, targeted help that doesn't leave the workers hanging out to dry. But dismissing it automatically isn't necessarily a good idea.

Blogger Unknown said...

I think you meant to say Bob Lutz.

Blogger tlaskawy said...

Oops! You're right. I sure hope Frank doesn't lose his job because of me....

Blogger Peter Schmidt said...

A colleague pointed out to me that the government has an existing system, that costs the taxpayers almost nothing, for helping distressed companies recover from their problems with a measure of protection. That process is called chapter 11 bankruptcy. This balances a management-friendly and creditor-friendly approach, with an ability to reorganize the enterprise in a shape that can move forward. What could the government be doing to facilitate re-organization through bankruptcy? Offer a stop-loss on DIP financing.

I oppose bankruptcy for GM for several other reasons, but chapter 11 bankruptcy is not a guarantee of 3 million pink slips. I was a customer of a WorldCom datacenter through WorldCom's bankruptcy, and got to see day-to-day operations at the company. Sure, there was obviously some stress, but the staff was there, getting paid, and the lights were on. (At least until they burned out: it seems that Home Depot or whoever wouldn't extend them the credit to replace burned-out light bulbs, and data center staff occasionally could be found moving one bulb from a two-bulb fixture to one where both were burned out.)

Blogger tlaskawy said...

$20,000 car purchases are not the same as corporate contracts with datacenters (nor are they like airlines tickets which is also a popular comparison) - with a datacenter there's a significant cost to switching providers and a lot of benefit to the bankrupt company from simple inertia among customers. people simply would not buy a new car from a company in bankruptcy when there are a dozen other brands to choose from. and GM's credit would also go away - suppliers would likely accept cash only. no supplies, no cars. bankruptcy just won't work. there is some discussion of a "special" form of bankruptcy that should be enacted for GM. but that's just a bailout with debt-related strings attached.

Blogger Peter Schmidt said...

Yes, orders would go down, but dealers are independent businesses who would sell cars off the lot. How many of us have considered buying a new TV at circuit city now that they are... screwed? The real question is, why should taxpayers finance the repayment of debt that was sold to willing investors who understood the risks? I'd like to believe that a government guarantee on DIP financing (and maybe the government would extend that guarantee to supplier-creditors) would be sufficient to convince the public that, while the company was going to go through bankruptcy to restructure, the key words are "through" and "restructure". When you've got such a massive organization with so many appendages and constituencies, it will take a crisis to change its course. If all we do is finance the company, then there's no reason to expect that when that financing runs out, we won't be in the same boat.

As you point out, GM has turned into a much stronger enterprise. It's the capital structure that is killing it. Bankruptcy was designed for exactly this situation.

Blogger Bob said...

Excellent post.

The one thing I would disagree with you on is the need to fire some of the CEO's.

“Should some or all of GM senior management be shown the door. Yes: Mr. Lutz, here's your hat.”

Mullally has only been there a couple years as has Nardelli (although the guy who nearly killed Home Depot is another story.)

Wagoner is the only guy who has been there for any length of time and we can debate his stay. Under Wagoner, GM has invested billions upon billions into its North American plants over the years leading to higher quality and productivity. I am sure people have plenty of reasons to attack Bob “global-warming-is-a-crock” Lutz. But he is a true car guy, who has supervised and advocated for some of GM’s best, award-winning cars, including the CTS, the new Malibu and even the Chevy Volt. Without him, I think GM’s cars would not be as exciting as they are beginning to be.

To me, firing executives is just the same, short-term, Wall Street thinking that gets a lot of American companies into messes like this one.


Blogger Peter Schmidt said...

@Bob: good comment. I think that we all agree that the problem with GM is in its obligations, not it's business. There's no reason to blame operational leaders who have already turned around GM's business when the problem lies in collective bargaining agreements built on decades of precedent and obligations that may have seemed wise a generation ago. Let's not waste taxpayer money pushing off the collapse for another year. A financing transaction might provide a tiny benefit. Bankruptcy provides the vehicle by which GM can be re-launched as a viable company.

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